FTC: Antitrust Enforcement Critical to High-Tech Growth

Speaking before the American Antitrust Institute Conference in Washington, D.C. on Thursday, U.S. Federal Trade Commission (FTC) Chairman Robert Pitofsky said that government enforcement of antitrust laws in the high-tech sector is critical to continued economic growth.

In opposition to the view that the U.S. government should adopt a hands-off policy and allow market forces to regulate monopolies, Pitofsky believes that the core principles of antitrust policy developed over a century ago are still valid today. Those principles include the idea that predatory and exclusionary behaviors are of concern when they achieve, maintain or create a dangerous probability of monopoly power.

Although the Chairman did not directly address the Microsoft antitrust case, his remarks came hot on the heels of a federal court order to break up the software giant. The government is also waging a high profile antitrust battle against Visa and MasterCard over whether the companies have conspired to keep others out of the credit card market.

Pitofsky said that recent antitrust cases “have disturbing implications for the future of antitrust in high-technology industries” because they have upset the balance between intellectual property and antitrust laws.

Entry Barriers

Rebutting the common argument that high-tech sector is “so dynamic” that monopoly powers will be short-lived due to market forces alone, Pitofsky said that even though barriers in the high-tech sector may be lower than in traditional sectors, they are still substantial.

The Chairman said that “The systems designed to encourage and protect innovation — patents and copyrights — can and often are used to barricade a market against entry by new rivals.”

‘Network Effect’

High-tech companies, according to Pitofsky, also use the so-called “network effect” to keep competitors out of the market. The network effect occurs when a single firm “becomes or threatens to become the only supplier of certain products or services, because of the value of compatibility or interoperability,” he said.

He added, “Consumers are more likely to remain with the established network because of their sunk costs (sometimes referred to as ‘lock-in’) and suppliers of complementary products will tailor those products to the established network and resist preparing products for would-be challengers.”

For example, in April, U.S. District Judge Thomas Penfield Jackson found that Microsoft violated U.S. antitrust law by incorporating its Internet Explorer (IE) browser into software products and by spending money on IE — which the company acknowledged was not profitable — in order to eliminate competing Internet browser Netscape Navigator.

Complementary Regimes

According to Pitofsky, intellectual property rights must be applied in a way that does not disrupt the traditional balance between intellectual property and antitrust. He added, “the history of the past 110 years has treated antitrust and intellectual property as complementary regimes, both designed to encourage innovation within appropriate limits.”

While the government is comfortable rewarding innovation through patents and copyrights, it must be done in such a way that the compensation is “not significantly in excess of that necessary to encourage investment in innovation, and the market power that results is not used to distort competition,” Pitofsky said.

Rash of Suits

The Internet has spawned a rash of intellectual property disputes. Amazon sued BarnesandNoble.com over its 1-Click technology, and was sued by Intouch Group, Inc., a San Francisco, California-based provider of Internet music sampling technology

Other high profile intellectual property disputes include DoubleClick and 24/7 Media, Priceline and Expedia, as well as AskJeeves and two scientists from the Massachusetts Institute of Technology (MIT).

Pitofsky concluded his address by saying a tilt in favor of intellectual property is not necessary to encourage the process of innovation and may come at the cost of adequate antitrust protection.

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